The Rise Of Anti-Establishment Italy

After the UK Brexit and the Trump triumph in the US, the rise of anti-establishment Italy is hardly a surprise. It is the effect of half a decade of failed austerity doctrines in Europe and decades of failed political consolidation in Italy – ever since the notorious Tangentopoli scandals.

While Italy’s constitutional referendum heralds a political earthquake that will eventually affect both France and Germany, the immediate result is more uncertainty in economy, political polarization and market volatility.

Anti-Establishment Italy

End of an era in Italy – and Europe

Only hours after Italians had casted their ballot in the referendum on constitutional reforms, Prime Minister Matteo Renzi announced his resignation after heavy defeat.

Renzi’s ‘Yes’ camp included most of his Democratic Party (DP) and centrist allies, and the tacit support of moderate voters, including some from Silvio Berlusconi’s Forward Italy (FI). In turn, the opposition lineup featured Beppe Grillo’s Five Star Movement (M5S), the regional Northern League (NL) led by Matteo Salvini in alliance with the far-right Brothers of italy’s (Fdl) and Berlusconi’s Forward Italy (FI), a significant minority of PD allies, a number of small leftist groups,

According to projections, almost 60% of voters rejected constitutional changes. “My government ends here,” said Renzi from Palazzo Chigi. Moments later, he acknowledged that his pledge to resign if defeated at the polls had been a mistake.

“Democracy has won, the times have changed” concluded Beppe Grillo, the leader of the opposition’s Five Star Movement (M5S), calling for elections to take place as soon as possible. In his tweet, NL’s Salvini left little doubt about his preferred international partners: “Long live Trump, long live Putin, long live Le Pen, long live the Northern League.”

Again, media headlines reflect a “surprise,” an “upset,” a “disruption.” But by now, such views are plain silly. Last summer, I projected that Renzi was about to undermine his rule because of his pledge, which ‘politicized’ the constitutional referendum. Indeed, since the onset of the European sovereign debt crisis in spring 2010, I have argued that the policy solutions at Brussels and the core EU economies – including multiple “bailout” packages and the broad austerity regime – have been misguided, flawed and inadequate. Well before the UK referendum, I predicted the Brexit outcome. In effect, the outcome of the Italian referendum was fairly clear already in summer, when I forecasted the demise of the Renzi regime.

The problem is that most mainstream policy observers and media remain far too close to the political class and its financiers in Washington, London, Brussels, Rome and other advanced economies.

Few days ago, Alessandro Di Battista, a rising star of Grillo’s M5S issued a call to arms. Renzi’s referendum, he told the crowd, was just the latest gambit by a political class determined to insulate itself from the people it should serve. “There are two Italys: on the one side the very wealthy few who look after themselves, and on the other the masses who live every day with problems of transport and public health.”

Battista’s words were followed by the Five Star chant, “A casa! A casa!” (“Send them home”). M5S got what it wished for.

What next?

Despite neo-liberal dreams of continuity for Renzi’s regime, the triumph of Beppe Grillo was only to be expected. The same goes for the rise of government bond yields after the referendum and the relative weakening of the euro. These, however, are likely to prove temporary reactions.

If M5S takes charge of the government, the responses of the financial and currency markets will be more destabilizing and capital outflows are likely to escalate. Italy’s volatility could also result in a new sovereign downgrade, which would undermine the perception of stability that the European Central Bank (ECB) has struggled to maintain since the early 2011.

The political future of Italy will be harder to forecast, especially in the near term. First of all, Renzi’s constitutional referendum will be followed by Italy’s general election, which should take place already by summer 2017. If Renzi had won the referendum, his fragile political victory would have had to cope with the opposition’s attacks. Since the opposition won, that could pave way to a new referendum on Italy’s Eurozone membership, which, in turn, could result in an ‘Italexit’ – a fatal blow to European integration.

But how likely is this sequence of events?

As Italy has now rejected the constitutional referendum and given the M5S the critical political mandate, the latter should solidify its leadership in the general election while promoting its plan to hold a referendum on the Eurozone. Since almost every third Italian voter today supports M5S, this sounds viable but it will not be easy. After all, the Italian political landscape remains fragmented and fluid. Moreover, unlike its rivals, M5S shuns political alliances, which it would need in the post-referendum transition to consolidate its political might.

Ironically, in the absence of the kind of streamlined governance that Renzi proposed, neither Renzi’s PD, nor Grillo’s M5S, or any possible third (most likely center-right or radical-right) party will find it easy to manage the post-referendum transition. Indeed, Renzi’s referendum, despite its stated objective to make Italy more governable, has made Italy more ungovernable, at least in the short term. And that, in turn, will favor economic uncertainty, political instability and market volatility.

At the regional level, this environment could initiate end-game in Europe. As long as the sovereign debt crisis was limited to small Eurozone economies – Greece, Portugal and the like – which each represented less than 3% of the regional economy, bailouts were adequate to delay structural reforms. That period, however, ended in 2011, when the crisis spread to Italy and, to a degree, France. Together, these economies account for almost 30% of the regional economy. Today, bailouts are no longer an option. Economic solutions require structural reforms, which the Italy’s establishment shuns because these policies are seen as political suicide.

In contrast, opposition has seized the window of opportunity. If the center-left, anti-establishment and Euro-skeptical M5S fails to consolidate political power, it will open the door to radical right, particularly the Northern League, and the center-right opposition party Forza Italia.

Like M5S, the NL strongly opposed the October referendum. Unlike M5S, it represents radical right and is willing to form coalitions. The NL has been reorganizing its ranks to become a national party, with a Euro-skeptic platform. The party’s rising star Matteo Salvini perceives himself as Italy’s Marine Le Pen.

Salvini sees the euro as a “crime against mankind.” He is opposed to illegal immigration. On economic issues, he supports flat tax, fiscal federalism and protectionism. In demonstrations, he dons a Mussolini-style black shirt to court Italy’s extreme right group Casa Pound. In foreign policy, Salvini emulates Le Pen’s ideas, opposes the international embargo against Russia and supports Italy’s broader economic opening to Eastern Europe and Asia. In the US, he endorsed Donald Trump whom he met in Philadelphia last April.

Renzi’s fall, Grillo’s rise

Nicknamed il Rottamatore (the scrapper), the 42-year-old Renzi, former mayor of Florence, became the youngest person in history to be Italy’s Prime Minister in February 2014; younger than Mussolini. By then, the longest recession in Italy’s postwar history had ended. However,